Latin American currency rallies despite equity sell-off

Given the reality of inflation, the 'doves' at the ECB became increasingly quiet last week. A hawkish Dutch member of the Governing Council hinted that not only is it almost certain that interest rates will be raised in July, but that it could even be a 50 basis point hike. Meanwhile, US short-term interest rates are not rising much further. This is partly because a lot is already priced in around the Federal Reserve. As a result, the interest rate differential on the other side of the pond has narrowed: it is now no higher than in March. This trend should be positive for the euro, so perhaps we have already seen the worst. This week's PMIs are likely to be strong and will partially allay fears of a recession in the US. The ECB will then be given the space to continue its policy change and focus fully on keeping inflation under control.

British Pound

The latest figures from the UK also pointed out that sentiment and reality are far apart. Consumer confidence was lousy, but both jobs and retail sales were very good. Inflation was sky-high in April – as expected. The exchange rate of the British pound rebounded when the dollar went into a sell-off. The pound also managed to make some gains on the euro. In our view, there is no indication of an imminent recession, including this week's PMI numbers. The Bank of England's willingness to tolerate inflation because of the risks to growth appears to be misplaced. In the short term, the Bank of England's dovish stance is likely to weigh on the pound, but after the recent sell-off, we think this currency is pretty cheap and offers a stable opportunity for the longer term.

U.S. Dollar

Last week's strong retail sales data confirmed that the US consumer is not deterred by higher prices. However, this indicator is volatile, so too many conclusions should not be drawn from a single figure. U.S. yields followed stock prices down. The exchange rate of the US dollar, which for the time being seems to be linked to interest rate differentials with the rest of the world, also fell. This week, the minutes of the Federal Reserve's latest meeting will be published. We expect it to reiterate that the next two rate hikes are likely to be doubles (50 basis points). Markets have already priced all this in, so there is probably little left to price in at US short-term interest rates. We believe the dollar is susceptible to a lasting pullback.